Commissioner of Taxation v Sleight

The Prospectus 125 Under the heading "Special Rights Attaching to the Shares", the prospectus provided that a shareholder would have the following rights:

• for each 500 'A' class shares, an absolute and exclusive right to occupy a farm which "shall be an identifiable area of land of sufficient size to enable the planting, growing and harvesting of 5,000 tea trees at a planting density of 36,000 per hectare", and the right to use access roads. The member's farm would be separately identified on a master plan but might be relocated by the board of directors of the Land Company from time to time;
• to own and operate the business of the member, such business being defined by the Articles of Association of the Land Company as being the commercial cultivation, growing and harvesting of tea trees on the member's farm and the sale of tea tree oil produced therefrom;
• to have the Management Company manage the member's farm. Alternatively, the 'A' class shareholder could choose to manage his tea tree farm himself or appoint a contractor, employee or agent to do so, subject to satisfying the Land Company of the ability of that appointee, such consent not to be unreasonably withheld; and 126 The prospectus stated that these special rights would attach to the 'A' class shares until 1 July 2015 at which time those shares would become ordinary shares, the member's business would cease and the Land Company would take over the whole of the operations at Bungawalbin. Individual members would then, as holders of ordinary shares, be entitled to receive dividends from profits made by the Land Company in direct proportion to the number of shares held. 127 The prospectus also stated that there would be a policy of not recommending any dividends during the years 1995-1998 and thereafter dividends would be the subject of recommendation by the directors to a general meeting. 128 Attached to the prospectus were certain projections and opinions together with questions and answers.

the application form 129 By signing the Application Form the respondent and his former wife agreed to: (a) engage in the business of growing trees to produce tea tree oil on land leased to them by the Land Company; (b) have the Land Company, as their agent, enter into a Management Agreement with the Management Company; (c) purchase tea tree seed from the Management Company; (d) pay, in advance, one year's management fees to the Management Company; (e) apply for a loan from the Finance Company; (f) be indemnified against any inability of their tea tree business to meet interest and principal payments under the Loan Agreement; and (g) be bound by a deed between the Management Company, Inteq Custodians Limited ("the Trustee"), the Finance Company and a company known as Mobandilla Cotton Management Limited. 130 The financial effect upon the respondent and his former wife of signing the Application Form was as follows. They had to pay $50 for the purchase of tea tree seed and $1,000 as an administration fee ("the Administration Fee"). They also applied to the Finance Company to borrow $21,750 ("the Loan"). This was for the purpose of paying a management fee ("the Management Fee") of $21,000 and $750 of the $1,000 Administration Fee. They also agreed to pre-pay one year's interest on the Loan at a rate of 14% ($3,045) to the Finance Company and to pay a "one-off" indemnity fee of $400 to the Management Company for indemnity against any inability of their tea tree business to meet the interest and principal repayments under the Loan Agreement.

the management agreement 131 The primary judge summarised the obligations of the Management Company to the respondent and his former wife (described jointly in the agreement as "the Grower") essentially in the following terms: 1. to select the seed and substantially establish the two farms and the Grower's business of growing tea trees and producing tea tree oil for domestic and overseas consumption, by no later than 30 June 1995. 2. to cause each farm to be physically constituted on specified "Production Sites" during a period of 12 months after the execution of the Management Agreement. 3. to identify each of the Grower's farms by mark or number on a master plan thereby identifying the Grower's ownership of the oil contained therein. 4. to identify (with an identification mark) the seedlings owned by the Growers. 5. to perform the following duties: (a) selection, planting and propagation of tea tree seed; (b) planting on each farm sufficient seedlings to yield not less than 5,000 seedlings per farm at a density of approximately 36,000 seedlings per hectare; (c) maintain and cultivate the Grower's farms, including growing, watering, weeding, selecting, procuring and applying appropriate fertilisers, nutrients and herbicides and doing all other things reasonably necessary for the purpose of maintaining and cultivating the Grower's farm in accordance with good and proper farming practices; (d) to keep the farm free of competitive weeds, by eradicating them and exterminating all vermin, noxious animals and insects; (e) to harvest the Grower's trees ideally at a time estimated by the Management Company when oil yields from the leaf would be at their highest and, using facilities provided by the manager, to process the harvest of leaf into tea tree oil; (f) to procure all necessary plant, equipment, machinery, goods and materials to enable the performance of the above services and procure the use at the farm site of suitable irrigation, fencing, drainage and shelter for the trees and any other necessary fixtures or improvements required for the purposes of performing such services; (g) to market, sell and deliver the Grower's tea tree oil; (h) to arrange insurance for the Grower's tea trees for such amount of cover and with such insurers as might be determined from time to time by the Management Company; (i) to obtain professional services and advice which the Management Company might consider necessary or desirable in connection with the maintenance and cultivation of the Grower's farms or the harvesting of the Grower's trees and the marketing of the tea tree oil produced; and (j) provide research and development into those matters which the Management Company considered might benefit the Grower's business. 132 Under the terms of the Management Agreement the Grower agreed to pay to the Management Company for its services: (a) for the period of 13 months commencing on and including 30 June 1995, a Management Fee of $12,000 per farm, by equal monthly instalments in advance, provided that the Grower might at its option pre-pay that fee upon entering into the Management Agreement whereupon such fees would be reduced to $10,500 per farm ("the Management Fee"); (b) for the periods commencing 1 August 1996 to 30 June 1997 and 1 July 1997 to 30 June 1998, by assigning to the Management Company the proceeds of all trees grown and harvested and oil distilled in the preceding 13 month period. In the event that such proceeds in any year were not sufficient to pay the Management Fee for that year, such fee or part thereof could be paid out of the gross income of the Grower's business in any subsequent year. Subject to the gross income of the Grower being made available in its entirety by the Grower to the Management Company for the purpose of paying the Management Fee, the Management Company would have no recourse to the Grower for those management fees; and (c) for the year commencing 1 July 1998 and subsequent years, a fee calculated at 42.5% of the Grower's entitlement to the gross sale proceeds. 133 In accordance with those provisions the respondent and his former wife jointly incurred an obligation to pay $10,500 per farm i.e. a total of $21,000 as the Management Fee in respect of the first year of income (13 months prepaid).

the loan agreement 134 In this agreement the respondent and his former wife were described as "the Borrower". Under the terms of the Loan Agreement, the Finance Company loaned them $21,750 ("the Principal Sum"). The obligations of the Borrower were to pay interest on the Principal Sum during the first and second year at the Finance Company's higher rate of interest of 18% per annum, discounted by 4% if prepaid. From the third year onwards, the interest rate was discounted from 18% to 4% per annum if the Borrower had entered into the Loan Indemnity Agreement. 135 The Borrower was also obliged to make a principal repayment of $7,400 on or before 30 September 1995. [The respondent and his former wife paid that amount by cheque drawn on their partnership account on 22 September 1995]. 136 Thereafter, if the Borrower entered into the Loan Indemnity Agreement, the Finance Company would accept 50% of the net profit from the business of growing and harvesting tea trees and distilling the harvest to produce oil (described as "the Business") in repayment of the Principal Sum, up to a term of 20 years. Although (by a provision in the schedule to the Loan Agreement) there was reference in the Loan Agreement to further principal repayments of $2,050 per annum for a period of 7 years, clause 5 of that document provided that notwithstanding that provision, the Finance Company would accept as repayment of the Principal Sum an amount equal to 50% of the net profit of the Business in lieu of the scheduled repayment. 137 By another provision in the Loan Agreement, the Borrower authorised the Finance Company to remit the Principal Sum to the Trustee to be applied by the Trustee towards the obligation of the Borrower to make payment of the Management Fees pursuant to the Management Agreement and to pay the balance to the Land Company in payment of the Administration Fee. 138 The Borrower also authorised the manager (unidentified in the Loan Agreement) to pay to the Finance Company, from the net income of the Business, the Principal Sum and interest and all other monies which might from time to time become owing to the Finance Company pursuant to the Loan Agreement.

the loan indemnity agreement 139 This agreement was entered into between the respondent and his former wife (again described as "the Borrower"), the Management Company ("the Indemnifier") and the Finance Company. The Borrower agreed to pay to the Management Company, as indemnifier, an indemnity fee of $400 ("the Indemnity Fee") and warranted to pay the Finance Company the first year's interest and the first principal repayment in accordance with the Loan Agreement. 140 In return, the Indemnifier agreed to guarantee to meet interest payments due from year 3 onwards under the Loan Agreement and to warrant to the Finance Company that at the end of the term of the Loan Agreement it would indemnify the Borrower in respect of any remaining obligations under the Loan Agreement.

the transactions 141 In what the primary judge described as actions taken "in purported pursuance of" the above agreements, the following events took place in the year ended 30 June 1995: (a) the Finance Company remitted the sum of $21,750 to the Trustee; (b) the Trustee remitted the sum of $21,000 to the Management Company and the sum of $750 to the Land Company; (c) the respondent and his former wife paid: (i) the sum of $250 to the Land Company, being the balance of the Administration Fee; (ii) the sum of $400 to the Management Company, being the Indemnity Fee; (iii) the sum of $3,045 to the Finance Company, being a prepayment of the first year's interest pursuant to the Loan Agreement; (iv) $50 to the Management Company for the purchase of tea tree seeds; and (v) $1,000 to the Land Company by way of subscription for 1,000 'A' class $1 shares in that Company. 142 The transactions were recorded by the various companies by entries in their books of account and a "round robin" type exchange of cheques between the Finance Company and the Trustee. 143 The result was that the respondent and his former wife made cash outlays of $4,745 pursuant to the various agreements. When the additional liability incurred on their behalf in respect of management and administration fees was taken into account, namely the sum of $21,750, the total amount paid or incurred as a liability by them was $25,445 (excluding $1,000 subscribed for the shares and $50 for the purchase of the seeds which were treated as expenditure of a capital nature).

taxation history 144 In the 1995 year of income the respondent returned as assessable income the amount of $61,102. From that amount he claimed as deductions a total of $56,268 losses from primary production. These losses were from expenditure in relation to the Project and other similar projects. The result was a taxable income of $4834 upon which no tax was payable. 145 The losses from primary production, as claimed, included the respondent's share of the deductions claimed from participation in the Project. No details of that participation were included in his income tax return as lodged and no notice was given by him in that return that his claim for a deduction was limited to a half share in a partnership through which he participated in the Project. 146 An audit by officers of the Commissioner's department of the affairs of the promoters of the Project revealed that the respondent had participated in the Project, but not that he had done so as a partner in partnership with his former wife. 147 On 7 October 1999 a Mr D'Cunha, an officer in the appellant's Department, made a determination pursuant to s 177F of the Act that the respondent would not be allowed the whole of the tax benefit claimed by him as expenditure incurred in the Project in the 1995 year ("the First Determination"). At that stage, the Commissioner thought that the deductions which had been allowed were in the sum of $25,445. 148 On 12 October 1999 the Commissioner issued to the respondent an amended assessment for the 1995 year to give effect to the First Determination ("the First Amended Assessment"). 149 On 7 December 1999 the respondent lodged an objection to the First Amended Assessment. 150 On 8 December 1999 the appellant issued to the respondent a second amended assessment ("the Second Amended Assessment") allowing deductions in the sum of $12,723, which reduced the deductions previously disallowed by the First Amended Assessment to the sum of $12,722. This followed advice given on 8 November 1999 by the respondent's tax agent to the Commissioner that the respondent's tax benefit from participation in the Project was half of the amount disallowed, being his individual share of the partnership loss. 151 On 24 January 2000, the Commissioner made a determination ("the Second Determination") pursuant to s 177F of the Act cancelling the tax benefit in the sum of $12,722. This was made by Mr Thomas Lund, Acting Director of Small Business, Executive Level 2. 152 On 21 December 2000, the Commissioner disallowed the respondent's objection to the First Amended assessment. The basis of such disallowance was that: (a) the respondent's participation in the Project did not amount to the carrying on of a business; (b) the expenditure was incurred for a purpose other than to derive assessable income; (c) alternatively, the expenditure on Management Fees, Administration Fees and the Indemnity Fee was capital or of a capital nature; (d) alternatively, the dominant, if not the sole purpose, in participation in the Project was to obtain a number of tax benefits and Part IVA of the Act applied to deny those benefits. 153 The effect of this objection decision was to affirm the First Amended Assessment to the extent that it disallowed the sum of $12,722. The same objection decision confirmed the Second Amended Assessment which excluded $12,773 from the respondent's taxable income for the 1995 year. 154 On 22 December 2000 the respondent, by an election made under s 14ZZ(a) of the Taxation Administration Act 1936 (Cth), appealed to this Court against the objection decision. 155 On 5 November 2001, the appellant served upon the respondent a new determination (dated 5 November 2001) made under Part IVA of the Act for the year in dispute ("the Third Determination"). The Third Determination was substantially the same as the First Determination and the Second Determination, save that it was made by Mr Neil Mann, a Deputy Commissioner. No notice of amended assessment for the 1995 year has been issued subsequent to the issue of the Third Determination.

the decision at first instance 156 His Honour first considered whether the outgoings referred to above were necessarily incurred by the respondent in the course of a business carried on by him i.e. whether they fell within the first part of s 51(1) of the Act. His Honour dealt, in sequence, with the various factors upon which the appellant relied for its contention that the outgoings did not have that character. 157 Although his Honour did not expressly so hold, it is clear enough from his reasoning that his Honour found that the outgoings were necessarily incurred by the respondents in the course of carrying on a business. 158 His Honour then turned to the question whether those outgoings were of capital or of a capital nature. He found that they were not. 159 Finally, his Honour considered whether the appellant was entitled to cancel the tax benefit resulting from the foregoing conclusions, on the basis that there existed a "scheme" within the meaning of s 177A(1) and, if so, whether, having regard to the factors listed in s 177D(b) it would be concluded that the person or one of the persons who entered into or carried out the scheme or any part of it, did so for the purposes of enabling the respondent to obtain a tax benefit in connection with the scheme. 160 The Commissioner submitted that the scheme was the making and implementation of the various agreement which comprised the Project. The parties to the scheme were said to have included the respondent and his former wife, Mr B Hooker of the Management Company, the Land Company, the Finance Company, the Manager, the Trustee, Mr Warwick Young and Project Management Services Pty Ltd. The respondent did not challenge this formulation of the scheme. It was common ground that the tax benefit was the respondent's proportion of the deduction of $25,445 claimed by the partners in the 1995 year. 161 After considering the various matters referred to in s 177D(b) his Honour came to the conclusion at Part IVA of the Act did not apply.

Section 51 162 The Commissioner's grounds of appeal in relation to s 51(1) of the Act can be summarised as follows. The primary judge erred in concluding that the amount of $12,722 was deductible (Ground 10). His Honour should have held that the respondent was not, by his participation in the Project carrying on a business and that amount was not wholly or partly a loss or outgoing necessarily incurred by him in the course of a business being carried on by him for the purpose of gaining or producing assessable income (Ground 11). Alternatively, his Honour should have held that that amount was wholly or partly a loss or outgoing of capital or of a capital nature (Ground 12). His Honour erred in failing to evaluate, adequately or at all, whether the respondent was, by his participation in the Project carrying on any, and what, business (Ground 13). 163 In Ground 14 of his notice of appeal the Commissioner listed seven matters which he contended that the primary judge had failed to consider adequately or at all, alone or in combination. Finally, in Ground 15 the Commissioner asserted that, if his Honour had had proper regard to those matters he ought to have held, amongst other things, that the respondent was not carrying on a business, that the abovementioned amount was not a loss or outgoing necessarily incurred by the respondent in the course of a business being carried on by him for the purpose of gaining or producing assessable income, that that amount secured for the respondent an investment in the business of another person and was an outgoing of capital or of a capital nature.

my reasoning 164 It is convenient to consider the seven matters relied upon by the appellant.

(a) Whether any area of land or trees was or were defined or identifiable as being the respondent's land or trees 165 His Honour dealt with this matter in paras [43]-[46] and [68]-[70] of his reasons. First, he referred to the Commissioner's submission that the board of directors of the Land Company had power under Article 4(3)(b) to "relocate a member's Farm" to such positions on the land as it might in its absolute discretion determine. 166 His Honour noted that there was no evidence that the board had exercise that power. He expressed the view that he did not consider the existence of the power alone resulted in any lack of identification of the respondent's Farm. 167 The evidence before his Honour, as he observed, was that the documentation provided for the identification of a member's Farm and this had occurred in the case of the respondent. His Honour referred to the evidence of the respondent and a Mr Lindhout as supporting that finding. He noted that identification was in any event "a necessary concomitant of the exercise of the right of any member to self-manage the farm or to appoint a contractor to do so". 168 His Honour, at paras [68]-[70] referred to evidence that the respondent's Farms were identifiable from a map, in the sense that (according to Mr Lindhout's evidence which the primary judge appears to have accepted) one could probably work out from the scale of the map and the positioning of the farm exactly where it was on the ground. The respondent's evidence was that he knew roughly where his farm was, had driven within ten metres of it, and was able to see that trees had not died and were healthy. 169 Finally, his Honour referred to two decisions of Full Courts of this Court for the proposition that even if the respondent's Farm could not be identified, that would not mean or support the inference that no business was being carried on. 170 The first was Federal Commissioner of Taxation v Lau (1984) 6 FCR 202. That case concerned an area of pine plantation land described as being "approximately 14 hectares" and as Lot number 16 in the schedule, but there was not any effective subdivision nor any delineation of that, or any other lot in the area (see p 204). 171 At p 207 Fox J said this: 'The early lack of definition of the land is not in my view of any consequence. It was intended that the subject area be defined, and this was in fact done, although not in the same taxation year. It can hardly be said that the rent was anything else but a payment for the use of the land to be used for the growing of pine trees for the taxpayer.' 172 Jenkinson J agreed with both the reasons given by Fox J and, the third judge in the appeal, Beaumont J. 173 At p 220, Beaumont J observed that it was common ground that, taken alone, the lease instrument did not sufficiently identify the leased premises. His Honour added: 'It would seem that, at an uncertain later date, the taxpayer's area was identified as Lot No 16. There can be little doubt that, considered as at 23 April 1981 [the date of the lease - see p 212] and subsequently, there was vested in the taxpayer equitable proprietary rights in respect of the area to be planted or, at the least, equities, by virtue of which he could have proceeded to protect his interest in the land. Whether these rights or equities were in the nature of a leasehold interest or by way of a profit ŕ prendre need not be pursued here … Taking the worst position from the taxpayer's standpoint, even if the moneys in question were laid out by him in connection with no more than a de facto lease, the expenditure was nonetheless incurred in what the learned judge found to be a genuine commercial context. Given the business character of the expenditure, any failure of the taxpayer to perfect his title to the premises could not, in my view, disqualify the taxpayer from claiming the outgoings as allowable deductions.' 174 In Commissioner of Taxation v Emmakell (1988) 22 FCR 157, the second of the two decisions relied upon by the primary judge, the taxpayer had entered into written agreements, purporting to be leases, relating to a total area of six acres upon which tea trees were planted. The lease was invalid on grounds which included a failure to identify the particular area leased and a failure to comply with legal requirements for a separate lease of any such area (see p 161). 175 The Full Court unanimously held that Lau was relevantly indistinguishable and was to be applied. At p 163 the Full Court said this: 'The written submissions of the appellant acknowledged that the "lease" and the management agreement must, in the present case, be read together. This concession was rightly made, for the two documents are so framed as to be interdependent. But the appellant's difficulty was then to distinguish Lau. The only distinction put forward in argument was a contention that, whereas in Lau the taxpayer carried on his own business, although through the agency of the manager, in the present case the business was carried on by the manager on its own behalf, being a business in the profits of which the respondent became entitled to share as an investor. But this argument flies in the face of the express findings by the Tribunal that the enterprise was conducted by Austral "qua manager". In any case, once the Tribunal accepted the documents as real and as not being shams, upon their true construction, the conclusion that Austral was carrying on the business of a manager only was a conclusion that followed as a matter of law. The documents plainly envisaged that particular areas of plantation, if not already identified, would be identified as the respondent's leased areas and would be managed on his behalf.' 176 In my view, there is no substance in this particular complaint. On the facts as found by his Honour and the law explained in Lau and Emmakell, he was, in my respectful view, quite correct to reject this submission.

(c) The Trustee's obligation to distribute proceeds without reference to quality volume prices or any other factor in relation to the respondent's oil 177 The documentation of the Project included provisions whereby a Grower who appointed the Management Company to manage his farms was obliged to pool his oil with the oil of each other Grower who entered into the Management Agreement, without regard to the quantity or quality of his own oil or that of the other Growers. Property in the oil-bearing leaves passed to the Management Company upon pooling. The Trustee was obliged to distribute a pro rata portion of the proceeds of such sale to the respondent depending on the number of the respondent's farms without reference to the quality, volume, prices, or any other factor in relation to the respondent's oil. The appellant submitted that this weighed against the proposition that the respondent was carrying on business and showed that he was simply a passive investor. 178 His Honour referred to a passage in Emmakell at p 164 where the Full Court described a pooling arrangement in relation to tea trees as being "… a sensible provision to facilitate operations …". His Honour went on to say that if the yield were not pooled and each individual farmer had a separate harvest and a separate production of oil, there would be considerable practical difficulties in the Management Company proceeding to market. His Honour inferred that the pooling arrangement, far from detracting from the character of the applicant operating a business, confirmed it. 179 In my view, the primary judge did not err in reaching that conclusion. I think that these were sensible, businesslike arrangements.

(d) Respondent's lack of actual or effective control in respect of his individual interest in the Project;

(f) Whether the Managing Company, in substance, conducted the Project in its own right or on behalf of the respondent as his individual business 180 I think it should be emphasised that there is no suggestion that the documents to which the respondent became a party were a sham. Accordingly they must be regarded as genuine and having taken effect in accordance with their terms being terms which gave effect to the intentions of the parties. 181 The documentation clearly showed that each subscriber for 1,000 'A' class shares had the right either to manage his farms himself or to appoint a contractor, employee, or agent to manage the farm subject to satisfying the Land Company that such a person had the ability to do so. Under the documentation, the Right to Occupy included a right in common with all other Growers to use the access road in and around the farms. There may well have been an implied right of access over the over Growers' farms, but it is not necessary to decide that question. 182 Mr G T Pagone QC, senior counsel for the appellant, submitted that the respondent did not have the power to terminate the Management Agreement without securing a special resolution passed by 75% of the members who had appointed the Management Company as their manager. 183 In my view, this misconstrues the documentation. The Management Agreement imposed on the Management Company the obligations which I have summarised above. Under clause 11.2 of the Management Agreement the respondent as an individual Grower had the right to determine that agreement (by notice) upon material default by the Management Company and failure to rectify, and in certain other circumstances. The provisions to which Mr Pagone took us relating to a special resolution (see pp 245 and 296 of the appeal book), being Regulation 4(5) of the Land Company's Articles of Association, do not in my opinion, have the effect asserted by Mr Pagone. Those provisions expressly preserve [AB 245, 296] the individual Grower's independent ability to terminate "his" Management Agreement. As I read Regulation 4(5) it is concerned with the termination (by the Growers acting as a group) of the Management Agreement as a whole i.e. complete removal of the Management Company from the Project. 184 As to the conduct of the Project as a whole, my assessment of the practicalities is that it made good commercial sense for each of the Growers to appoint the Management Company as their agent to carry out the farming, harvesting and marketing activities for the Project as a whole. That factor, did not, in my view, weigh against a characterisation of each of the individuals carrying on business through the agency of the Management Company. On the contrary, once again, it was a businesslike thing to do. 185 In substance, the documentation shows that the Management Company was carrying out its work as agent for each of the individual growers and not in its own right. 186 In my view, the primary judge did not err in his assessment of these factors.

(g) Lack of any continuing business-like activity or risk 187 In the absence of any assertion that the documentation was a sham, once it is accepted that the Management Company was carrying out all of its activities on the respondent's farm (and on the farms of the other Growers) this ground falls away. There was a continuing business-like activity being carried on by the respondent through his agent, the Management Company. It is true that the risk was spread among and shared with the other Growers who had also entered into the Management Agreement but this did not remove the element of risk.

Conclusions on the s 51(1) point 188 In my view, the factors upon which the appellant relies, whether taken individually or collectively, indicate that the respondent was carrying on a business. The authorities show that the question is essentially one of fact and in my view, it was quite clearly open to his Honour to make that factual finding. No error of law on his Honour's part has been demonstrated in the process of reasoning which led him to that conclusion. 189 The appellant's submissions that the outgoings in question were of capital or of a capital nature depended on much the same factors as were advanced for the submission that the respondent had not carried on any business. The appellant's basic argument was that there was no commercial activity on the respondent's part other than to receive, in return for his initial cash outlay, the promised share of proceeds from the tea tree oil. 190 Having regard to the traditional guidelines applied in authorities such as Sun Newspapers Ltd v Commissioner of Taxation (Cth) (1938) 61 CLR 337 at 363 and GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124 at 137 (and the other authorities there cited), I think that the character of the advantage sought by the outgoings and the manner in which the advantage was enjoyed by the respondent show that these outgoings were made on revenue account. I think that the primary judge was quite correct in reaching that conclusion. 191 Subject to the application of Part IVA, the appellant has not made out his grounds of appeal. I now turn to consider that aspect of the appeal.

part IVA 192 There were two main challenges by the appellant to his Honour's conclusion that Part IVA of the Act did not apply to the scheme which the appellant had identified at first instance. That scheme was the making and implementation of the various agreements which comprised the Project. As I have mentioned, the parties to the scheme were said by the appellant to have included the respondent and his former wife, Mr B Hooker of the Management Company, the Land Company, the Finance Company, the Manager, the Trustee, Messrs Warwick Young and Project Management Services Pty Ltd. The respondent had not challenged that formulation of the scheme. 193 On appeal, the appellant sought leave to formulate a different scheme. For the reasons given by Hill J, with which I respectfully agree, I would refuse leave to the appellant to formulate a different scheme or schemes to that which he advanced at first instance. 194 The two challenges advanced by the appellant were, first, [ground 2(c)] that the primary judge had erred in evaluating whether the respondent had the requisite dominant purpose for the purposes of Part IVA by reference to whether the Project or its elements were commercial rather than by reference to the matters set out in s 177D(b) of the Act. The appellant's point was that there is not a true dichotomy between the existence of a commercial enterprise on the one hand and a dominant purpose to obtain a tax benefit on the other. That is, there was no necessary dichotomy between a commercial objective and the operation of Part IVA. 195 Secondly, his Honour had had regard, so the appellant contended, to the respondent's subjective purpose, contrary to the authorities which showed that the relevant purpose was to be assessed objectively. 196 The appellant submitted that the Project might well have had an overall commercial outcome, namely the growing, harvesting and selling of tea tree oil, but there were certain features, crucial to the application of Part IVA, by which the Project was structured for the dominant purpose of securing tax benefits. Those features served no commercial purpose. The features were as follows: (a) by means of the option form, opting to prepay the first year's Management Fee of $21,000; (b) via the Loan Agreement, borrowing the whole of that Management Fee as well as 75% of the $1,000 Administration Fee; (c) the participant's obligation to pay the Management Fee and the entitlement of the lender to remit that fee on the participant's behalf were satisfied by a "round robin" exchange of cheques, without any actual exchange of cash; (d) under the terms of the Loan Agreement and the Indemnity Agreement, the participant was not obliged to fund any payments beyond the balance of the administration fee ($250), prepayment of the first year's interest under the Loan Agreement ($3045) and the principal repayment in September 1995 ($7,400). 197 The appellant relied upon the fact that the scheme was established by prepayment of the Management Fee on 30 June 1995 for a project to be commenced in the following year. The procedure of prepayment being made by way of a loan effected by a "round robin" exchange of cheques and the recording of internal loans between the Finance Company and the Land Company yielded no external funds for the commercial operation of the scheme. By prepaying the large initial Management Fee ($21,000) the respondent was able to obtain the immediate advantage of the "large, up-front" tax deduction. 198 The appellant pointed to the fact that the overall commercial advantages of participation in the Project were speculative. The total projected after-tax return (assuming a 48.4 cents in the dollar marginal tax rate) was $5,542. 199 Furthermore, so the appellant submitted, his Honour had failed to have regard to the purpose of the promoters. He had not considered whether it would be concluded that the promoters carried out the scheme for the dominant purpose of obtaining the tax deduction for the respondent. 200 The respondent contended that the primary judge had correctly identified the correct test of ascertaining a dominant purpose objectively and had correctly applied that test by considering each of the eight matters stipulated in s 177D(b). His Honour had given, so it was put, careful thorough and detailed consideration to the features of the Project which the appellant alleged had served no commercial purpose. After doing so and, having regard to the entirety of the evidence, his Honour had concluded that the dominant purpose of the respondent (considered objectively) in entering into the Project was not to gain tax benefits, notwithstanding that obtaining tax benefits was a significant element. 201 The respondent submitted that it was not correct to argue (as the appellant argued) that the scheme gave the respondent an immediate tax deduction sufficient to fund his participation in the Project. The evidence simply did not sustain that argument. The evidence showed, so the respondent contended, that through participation in the scheme the respondent was out of pocket by $3,500 even after allowing for the benefit of the tax deductions. It would have made no sense, in those circumstances, for the respondent to have entered into the scheme for the dominant purpose of obtaining a tax deduction. 202 It is not necessary to recite here the remaining details of the respondent's submissions.

my reasoning 203 In the light of my conclusion in relation to the application of s 51(1) of the Act, there is no dispute that the respondent would obtain a tax benefit but for the application of Part IVA. 204 The authorities show that the first step in assessing the factors listed in the eight sub-paragraphs of s 177D(b) is to ascertain the objective facts (i.e. the facts of the present matter) which fall within the various descriptions contained in those sub-paragraphs: Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 421-422. It seems to me that those facts would be the facts as found by the primary judge plus any factual inferences which are either not contentious or, if contentious, are those which an appellate court is entitled to make in accordance with the usual rules. 205 It is also clear that the assessment of those factors is not intended to result in a factual finding about the respondent's actual dominant purpose. The judgment to be made is whether a reasonable person [see Spotless at 424], having had regard to those factors, would conclude that any of the persons who entered into or carried out the scheme (or any part of it) did so for the dominant purpose of enabling the respondent to obtain a tax benefit in connection with the scheme. The subjective purpose of the respondent, or indeed the promoters of the Project, is not relevant: Federal Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150; Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27. 206 The cases also show that a dominant purpose of enabling the respondent to obtain a tax benefit is consistent with the pursuit of commercial gain - see Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at 264 where the Court, after citing Spotless for that proposition, said this: 'The fact that the overall transaction was aimed at a profit making does not make it artificial and inappropriate to observe that part of the structure of the transaction is to be explained by reference to a s 177D purpose.' 207 But a part of a scheme cannot be a scheme in itself if it is incapable of standing on its own without being "robbed of all practical meaning": Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 383-384, the quotation is from Inland Revenue Commissioners v Brebner [1967] 2 AC 18 at 27. 208 I now turn to consider whether the primary judge erred in applying s 177D(b). In doing so I will, on occasion, refer to the respondent's purpose and to the promoters' purpose. But, in the light of the foregoing comments, it should be understood that I am referring to their respective purposes objectively assessed in accordance with the foregoing authorities. Furthermore, the quest for the dominant purpose is for one which "was the ruling, prevailing or most influential purpose": Spotless at 416.

the manner in which the scheme was entered into or carried out 209 Before considering this factor, his Honour chose to assess the marketing of the scheme and in particular what was described as the information brochure, the Prospectus and a letter from the Land Company to the respondent and his former wife. 210 I think that it is convenient to consider the marketing of the scheme as part of the first factor. In my view, his Honour did not err in his implicit finding that the methods by which the scheme was marketed did not emphasise tax effectiveness. So many other factors were referred to in the documents (principally the information brochure and the Prospectus) that I would regard those documents as being neutral in the assessment of the manner in which the scheme was entered into. 211 The manner in which the scheme was carried out is a factor which, in this matter, overlaps at least the second set of factors, but I propose to consider it here. The main steps which I consider to be of particular relevance were as follows:

• the respondent's election to prepay the first year's Management Fee of $21,000;
• borrowing the whole of that Management Fee together with $750 of the $1,000 Administration Fee in the context of the two further sets of steps referred to immediately below;
• the "round robin" exchange of cheques whereby on the same date cheques were drawn by the Management Company in favour of the Finance Company and deposited to the latter's account. Then cheques in identical amounts were drawn by the Finance Company in favour of the Trustee which in turn paid those amounts to the Management Company. The balance sheets of the Finance Company and the Management Company at the relevant times show that the Finance Company did not have cash at bank sufficient to meet the cheques which it drew in favour of the Trustee Company and that those cheques were presented to the Finance Company's banker on the same date as the cheques from the Management Company were deposited with the same bank;
• the respondent's entry into the Loan Agreement and the Indemnity Agreement which had the result that he was not obliged to fund any payments other than the balance of the Administration Fee ($250), prepayment of the interest for the first year under the Loan Agreement ($3,045) and a principal repayment in September 1995 ($7,400). The Finance Company was left to recover the balance either from the proceeds of sale of the tea tree oil or from the Management Company as Indemnifier. 212 The "internal loans" provided no funds for the establishment or operation of the plantation scheme. By prepayment of the Management Fee ($21,000) the respondent became entitled to a tax refund which substantially funded those payments required to be made by him actually in cash in the early months of his participation in the Project. 213 In my view, the circumstances referred to immediately above point very heavily indeed towards a dominant purpose on the respondent's part to obtain a tax benefit.

the form and substance of the scheme 214 The form of the scheme has been summarised earlier in these reasons. There was no suggestion by the appellant that the documentation was a sham. Accordingly, in my view, the form and the substance of the scheme were substantially the same. 215 In some cases that consonance would weigh in favour of a taxpayer. But in my view, and here I refer to the factors discussed immediately above, the substance of the scheme points very clearly towards a dominant purpose of obtaining a tax benefit. 216 A further fact under this heading is what can only be described as miniscule projected returns over a long period of time from a venture which on all the evidence involved significant risk so described in the Prospectus. 217 I have had the advantage of reading Hill J's draft reasons for judgment. I regret that I differ with his assessment that the primary judge erred in finding that the form and substance of the scheme were the same. Under the documentation each participant in the scheme had an option to manage their own farms. I do not think that the evidence sufficiently establishes the proposition that it was totally impractical for an individual participant to do so. I appreciate that the practical difficulties which might result from making such a choice would be relevant in the assessment of dominant purpose. But, I think that that matter would be more properly assessed under the heading of the manner in which the scheme was carried out. I prefer to adopt that course. In doing so, I would regard the difficulties of individual management as weighing additionally in favour of identifying a dominant tax avoidance purpose.

The time at which the scheme was entered into and the length of the period during which it was carried out 218 His Honour found that "this item" pointed against the respondent. I understand this finding to be a reference to the time at which the scheme was entered into. 219 I agree, respectfully, with his Honour's assessment of that part of this factor. Nevertheless, the second part, the length of the period during which the scheme was carried out (or was intended to be carried out) points to an on-going commercial operation taking place over a 20 year period. In my view, the second part of this factor cancels out the first part, when assessing the factor on its own. 220 However, the authorities show that not only is each factor to be considered separately, but that all of the factors are also to be considered together: Consolidated Press Holdings at 263. Accordingly, although I would regard this factor as being neutral, I think that a reasonable person would agree with his Honour's assessment that there was "a flurry of activity around the end of the tax year directed at obtaining a deduction in that year" (his Honour's quotation is from Hart at 227). In my view, that evidence has to be brought into account when making an overall assessment of the eight factors in s 177D(b), and I do so.

the result in relation to the operation of the act that, but for part iva, would be achieved by the scheme 221 It was common ground that but for the operation of Part IVA, the respondent would become entitled in the 1995 year of income to deductions totalling $12,722 in respect of management, administration and indemnity fees and interest and, in the following year, to deductions totalling $2,009 in respect of interest. This factor clearly points to a dominant purpose of obtaining a tax benefit.

change in the respondent's financial position as a result of the scheme 222 The primary judge's view was that the various features relied upon by the respondent [set out in paragraphs 126 to 130 of his Honour's judgment] did not point definitively one way or the other. He thought that they were "… as consistent with the commerciality of the Project as with any dominant purpose of acquiring a tax benefit". 223 As Hill J has pointed out in his draft reasons, there are difficulties in assessing the actual cash benefit to the respondent from obtaining the deductions. That is because ascertainment of the respondent's marginal tax rate depends upon the tax outcome of two other schemes into which the respondent entered. 224 In those circumstances, I consider that, on a proper construction of s 177D(b) the assessment should be made, in respect of this factor but not necessarily in respect of every factor, as at the time of entry into the scheme. A reasonable person would be entitled to draw his conclusion about dominant purpose on the basis that the respondent entered into three schemes at the one time and that each of those schemes would result (but for Part IVA) in the allowance of the deductions claimed. 225 I do not think that it is necessary to make a precise calculation of the net cash benefit derived by the respondent from these deductions. It is sufficient, I think, to note that they were substantial and to a large extent (on the approach which I have outlined just above) would have covered the outgoings required in the first two years of income. The figures can be found in Hill J's reasons. 226 On the other side of the scale must be placed the financial benefits which, so it was anticipated, would result from the scheme. 227 As Hill J points out, according to the Prospectus it would only be at the end of the seventeenth year that the respondent would have recovered in cash the amount initially outlaid. 228 I would regard this factor as indicating a dominant purpose of obtaining a tax benefit.

any change in the financial position of any person having a connection with the respondent, being a change that has resulted, will result or may reasonably be expected to result from the scheme 229 In my view, the only potentially relevant persons would be the promoters of the scheme. Hill J has expressed the view that they would hardly seem to be entities having any real connection of a business nature with Mr Sleight as that expression is used in s 177D(b). But the evidence in this matter shows that the respondent marketed the scheme for the promoters in return for commissions. In my view, that gives the promoters a business connection with the respondent. 230 As a result of the scheme, the promoters may reasonably be expected to be better off financially. 231 A major, central, factor of the scheme was the availability of tax deductions. The greater the chances of such availability the better prospects the promoters would have of improving their financial position. 232 However, there were hundreds of investors and in my view, a reasonable person would not regard this particular factor as indicating that the respondent entered into the scheme for the dominant purpose of obtaining a tax benefit. I would regard this factor as being neutral.

any other consequences for the respondent or other persons referred to in s 177d(b)(vi)

the nature of any connection between the respondent and any persons referred to in s 177d(b)(vi) 233 I agree with the conclusions of the primary judge and Hill J in relation to the first of this bracket of factors and with those of Hill J in relation to the second, that these factors are also neutral. 234 I have weighed each of the above factors individually and I have also weighed them cumulatively (including those factors which I have said did not appear to fall squarely in one factor to the exclusion of other factors). 235 I agree with Hill J that it is more likely than not that a reasonable person faced with having to draw the conclusion required by s 177D, would conclude that the respondent entered into or carried out the scheme with the dominant purpose of obtaining the tax benefits in issue. 236 With great respect to the primary judge, I think that he fell into error in finding that the overall commercial objective of the scheme saved the transaction from the application of Part IVA. I acknowledge that the scheme was set up in a commercial manner with a commercial objective. But the same applied in Spotless and that did not save the scheme in that case. 237 His Honour drew in his conclusions in the following terms: 'Having considered the matters raised in the application of s 177D it appears to me that, objectively viewed, the most telling item against the applicant is the flurry associated with the end of the 1995 year. The effect of that is modified by the evidence of the long term interest which the applicant had in the Project prior to the issue of the Prospectus. The assertions for the respondent based on the effect and utilisation of the tax deduction are either consistent with the applicant's purpose for being in the Project being a commercial one or are not sustained in fact. The result is that I am satisfied on a consideration of the items arising under s 177D and the applicant's case concerning them that the applicant's purpose for having entered the Project was not dominantly for the acquisition of the tax benefit. I am left in no doubt that the tax benefit was a significant element in his purpose but I am not satisfied it was the ruling, prevailing and most influential purpose. He was convinced the Project was commercial and that view formed a fundamental part of his purpose in entering into it.' 238 As to the first part of that conclusion, I would immediately concede (as does Hill J) that minds might differ, and I do differ, with respect. I think that the latter part of the passage quoted above indicates impermissible reliance upon the subjective purpose or motivation of the respondent.

The promoters 239 The appellant argued that the primary judge had failed to consider whether the promoters entered into or carried out the scheme for the dominant purpose of obtaining a tax benefit for the respondent. 240 It is not necessary for me to decide this point. But I am inclined to think that it has merit. A reasonable person would conclude that achievement of the promoter's purpose i.e. to obtain profit from marketing and carrying out the scheme depended, to a very substantial (even central) extent upon the payments made by the participants being allowed as deductions. In those circumstances it is difficult, in my opinion, to separate an objective purpose of profit making from the objective purpose of enabling each of the participants to obtain a tax benefit in connection with the scheme. 241 In a particular case evidence about, for example, securing reasonable profits from the on-going agricultural or other like operations might swing the balance the other way.

The validity of the first determination 242 I agree with Hill J's reasoning that the submissions raised by the respondent in his Notice of Contention should not be accepted.

Commissioner of taxation v cooke [2004] fcafc 75 243 Some weeks after judgment was reserved in this appeal, the solicitors for the respondent forwarded to members of the Court a copy of the reasons for judgment of a Full Court of this Court in the above matter, with the observation that they believed that the decision was relevant to the issues in this appeal. Quite rightly (since leave had not been granted) no further submission was made. 244 In relation to the application of both s 51(1) and Part IVA, the authorities show that each case is likely to turn on its own facts. In my view, that certainly applies to the relevance of Cooke to the disposal of this appeal. I see no inconsistency between the conclusions which I have drawn in this matter and the conclusions drawn in Cooke, particularly in relation to s 51(1). 245 As to Part IVA, so far as objective evidence relating to purpose is concerned, there are in my view, several factors which distinguish Cooke from the present matter. I refer, for example, to the generation of loans from an external source and the projected returns in Cooke of profits in excess of 20% per annum from the first year.

Conclusion 246 I agree that the appeal should be allowed, that the orders made by the learned primary judge should be set aside and replaced by orders dismissing the application. The respondent should pay the costs of the appellant both at first instance and on the appeal. But I agree with Hill J, for the reasons stated by his Honour, that the making of orders disposing of the appeal should be deferred for the purpose referred to in paragraph [111] of his reasons. I certify that the preceding one hundred and thirty (130) numbered paragraphs are a true copy of the Reasons for Judgment herein of Justice Carr.

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT HELY J: 247 I have had the advantage of reading in draft form the reasons for judgment prepared by the other members of the Court. I agree with the course proposed by Hill J and with his Honour's reasons for judgment. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Hely.

Associate: Dated: 4 May 2004 Counsel for the Appellant: G T Pagone QC, H Symon SC, L Price

Solicitor for the Appellant: Australian Government Solicitor

Counsel for the Respondent: M McCusker QC, F Wilson

Date of Hearing: 18, 19 February 2004